Chemical manufacturers taking a hit over IRS ruling on MLPs

HOUSTON (ICIS)–Axiall and Westlake Chemical Partners continued to experience a fall in stock prices on Wednesday, following the release of new proposed regulations from the Internal Revenue Service (IRS) that would block most chemical manufacturers from forming master limited partnerships (MLPs).

Wednesday morning Axiall dropped 9.4%, while Westlake Chemical Partners had fallen 14.2% since Tuesday.

The proposed regulations, announced on Tuesday, would mean that petrochemical producers cannot qualify as an MLP unless 90% of its income is from the mining and refining of minerals.

MLPs were originally designed to help exploiters of depletable mineral reserves build the necessary infrastructure to get product to market, including oil pipelines, many of which are organized as MLPs.

During a conference call with analysts on Wednesday, Axiall CEO Paul Carrico said that the IRS ruling is not clear on whether a chlor-alkali operation would qualify for MLP status.

The chlor-alkali process includes the production of chlorine and sodium hydroxide from salt mined from salt domes in Louisiana, in Axiall’s case.

Last year, Carrico said that Axiall was considering spinning its chlor-alkali division into an MLP, which gets a significant tax benefit by getting rid of corporate tax rates for that part of the business.

In the past, pipeline operators and other energy companies have structured themselves as MLPs to generate income, as they are not required to pay corporate-level taxes in the US.

US soda ash producer OCI Wyoming transitioned to an MLP in late 2013. That company mines trona and processes it to make soda ash, or sodium carbonate.

However, due to a surge in companies seeking to adopt an MLP structure in recent years, the US Treasury Department and IRS have proposed new regulations to address the issue.

The new regulations will apply to income earned by an MLP in a taxable year that begins on or after the date that the regulations are finalised in the Federal Register, and companies will have a 10-year transition period, under certain conditions.

The proposed regulations are open for public comment until August.

Additional reporting by Bill Bowen